Businesses (both large and small), as well as nations, often fail financially because they cannot support the debt they have accumulated – often accumulated over a short period in tough times.
When the chariot is racing around the coliseum and the crowd is hooting and hollering, despite the wobbly wheel about to fall off the hub, the driver prays and hopes for the best in his drive to the finish line – and the bag of coin.
Hope is not a strategy!
Firms face the highest failure risk when they are either young and small – or older and ossified.
Failure flows from the inability to generate self-sustaining levels of operating capital.
Yet, as the wheel is about to finally buckle, hope that all will be well still drives us on!
Much of the research suggests management inexperience and incompetence is the most consistent cause of business failure. We disagree with this simplistic view because it ignores the reality that both internal – and external – factors are often at play – and the initial strategic reason for creating the venture is not recognised. Businesses are created for a multiplicity and, often contradictory reasons, such as, for profit, for capital gains, for self-employment or simply for social benefit.
Sixty-three per cent of American adults over 50 and 46% in Britain plan to work in retirement for personal fulfilment or for the need to generate an income. At this age many have accumulated a financial nest egg, but the kicker is; drawing down that nest egg provides start-up capital but at the same time diminishes the capital available for retirement. Thus, the business has to be cash-flow positive – or eventual retirement can be bleak! Conversely, success can be the icing on the cake!
Exogenous shocks like cancelled contracts (not caused by the business owner), economic downturn and new entrants into the market are all outside the owner’s control. Yet responsibility for the downfall due to these factors is often assigned to the owner in the research models.
How does the following piece of research resonate in your mind?
In the midst of the most devastating global economic depression ever recorded, Cover (1933) is reported to have concluded that the major cause of retail bankruptcy was due to ‘discernible errors in management‘.
Banks closed, personal and business deposits disappeared, loans dried up, and retail consumption collapsed: all because of “…discernible errors in retail management…”.
What absolute nonsense!
Needless to say, new firms must establish sustainable cash flows before initial funds are depleted. And, older firms need to ensure that resources and capabilities continue to create value as competition escalates.
Keep the customer interested by regularly renovating your product/service offering, innovate faster than your competitor(s) and, ensure your enterprise is sufficiently agile to shift gears at short notice!
And, buy long and sell short!
A former colleague revelled in narrating the story of the creation and growth of what eventually became the multi-million dollar family business. It was financed via a 180 day payment scheme of arrangement with offshore suppliers – and product sold on C.O.D!
In effect, the supplier financed this business.
Some years past a highly successful entrepreneur was quoted as follows: “If I have a $1m debt with my bank, I have a problem. If I have a $10m debt, they have a problem!
Note, we are not espousing this approach in dealing with one’s bank!
Some research suggests that 75% of firms fail due to poor financial planning, but that is like saying the person became unconscious by not breathing: that may be literally true, but the causes could be many! Thus, we argue that the following arguments are probably more representative of what actually happens:
a) Bankruptcy is due to either an exogenous shock; or
b) The failure to implement a timely exit strategy!
We add in response to old the adage: “..…when the going gets tough, the tough get going..” “…and the smart ones ‘get out’ (before bankruptcy)!”
Poor cash management is undoubtedly the death knell to all enterprises, but the cause is not as simple as some research suggests – it is also (at least in part) as a consequence of uncontrollable events.
Needless to say, business is about assuming the throne as the cash flow king, or the pauper prince!
And, when is the best time to ‘pull the plug’ on the enterprise?
Remember that wobbly wheel, it only has to hang on for another lap (i.e., the next deal) – and the bag of coin is in hand! Well, maybe!